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Three Ways Biden Could Change Real Estate
The battle between big business and the federal government has reignited, as the Biden Administration attempts to reinstate Obama-era mandates and oversights through the Promoting Competition in the American Economy plan.
In an executive order summary on July 9, Biden outlined his plan to tackle corporate consolidation, stagnant wage growth, skyrocketing consumer costs and workers’ rights in several industries, including healthcare, transportation, agriculture, internet service, technology, banking and consumer finance.
“No more tolerance of abusive actions by monopolies. No more bad mergers that lead to massive layoffs, higher prices and fewer options for workers and consumers alike,” Biden said in a July 9 White House briefing. “Let me be very clear, capitalism without competition isn’t capitalism, it’s exploitation.”
Although the summary failed to explicitly name real estate, Biden’s Federal Trade Commission mandates regarding occupational licensing and noncompete agreements set off alarm bells, as the real estate industry navigates a rapid increase in licensing and consolidation as a handful of major brokerages compete to gobble up market share.
“It will set off an earthquake in the industry,” Bernice Ross, real estate consultant, makes mention of the order’s impact beyond real estate licensing and noncompete agreements, such as technology development and independent contractor status. “[However] I don’t know what ‘limiting or banning’ noncompetes or unnecessary licensing exactly means [to the FTC], to be perfectly honest.”
A final copy of the order published with the Federal Register on Wednesday offered little clarification about what “limiting or banning” would look like; however, a revision to the labor market mandates confirmed the real estate industry is on Biden and the FTC’s radar.
“To address persistent and recurrent practices that inhibit competition, the Chair of the FTC, in the Chair’s discretion, is also encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority, as appropriate and consistent with applicable law, in areas such as [the] unfair occupational licensing restrictions; unfair tying practices or exclusionary practices in the brokerage or listing of real estate; and any other unfair industry-specific practices that substantially inhibit competition,” the order read.
Peter Kaplan, FTC deputy director of public affairs, declined to provide Inman with any details about how they plan to tackle real estate licensing and noncompete agreements, and other “industry-specific practices” that inhibit competition. “We don’t have any comment,” he said in an emailed statement.
Michael Lissack, a real estate broker and consultant, said the industry needs to brace itself now, as the FTC is a “rulemaking body that can act as fast or as slow as it likes” with little room for states to push back on licensing reform in particular, thanks to the Interstate Commerce Clause that gives the federal government power to “prohibit state laws and regulations that interfere with or discriminate against interstate commerce.”
“[State real estate commissions] have this little problem called the Interstate Commerce Clause,” Lissack said. “There’s really nothing we can do. If the federal government chooses to decide to make an issue of [licensing], which clearly they’ve decided to make an issue of it, there is really nothing the states can do.”
“Now, it can’t happen instantly,” he added. “But once the FTC comes up with something, there’s nothing the states can do about it, other than in the FTC process indicate they’re not happy.”
Lissack said the transition will be more difficult for some states than others due to varying reciprocity (the ability to transfer a license) and portability (the ability to conduct a transaction in another state without transferring a license).
When it comes to reciprocity, only Alabama, Alaska, Colorado, Delaware, Georgia, Kansas, Kentucky, Maine, Mississippi, Missouri, Virginia and Washington offer full reciprocity, meaning they allow agents from any state to transfer their license. Another 12 states offer partial reciprocity, and the remaining 26 have no reciprocity, meaning they deny all out-of-state licenses and require agents to repeat the licensing process.
Although it’s unknown how the FTC plans to overhaul the licensing process, Lissack said he’s in support of a national real estate test with the option for agents to take additional state-specific tests for other markets they’d like to work in.
“In real estate, there are different state laws, and it is perfectly reasonable to demand that a Realtor coming from another state or [a Realtor] like me who’s licensed in a whole bunch of states, take a course that indicates familiarity with the state law and takes an exam based on that course,” he said. “[However], making somebody retake the national material every time they go to a different state does nothing for anyone except for enrich the schools that provide the courses.”
“If you’re like me and you’re licensed in multiple states, why do I have to take the same continuing education class?” he added. “It’s literally the same continuing education class to satisfy multiple states? Why can’t we take that class once and it counts?”
NexTitle President and Chief Operating Officer Russ Cofano said he sees the benefit of adopting a licensing system like Lissack suggested, especially as the coronavirus pandemic opened the door for more agents to work remotely and serve migrating clients.
“I could see a scenario where the states are required to recognize the license of a real estate agent as they might want to move from state to state to state,” he said. “We have COVID and post-COVID work-from-anywhere type of scenarios. We have a huge migration going on in our country, and I think the idea that you need to go get licensed in every single state that you might want to do business with can seem a bit unreasonable.”
However, Cofano said it’s important not to stiff consumers in the quest for greater flexibility for professionals. “[Current real estate licensing protocols] provide a significant consumer protection element. We’re dealing with significant financial transactions,” he said. “And it really is, unlike a lot of other licensing scenarios that quite frankly act more as an ancillary means of collecting tax revenue as it is protecting the public.”
What would the axing of noncompete agreements mean for companies?
The next big challenge issued in Biden’s executive order is the overhaul of noncompete agreements, which Ross said has the opportunity to shake up the real estate industry even more than the prospect of a national real estate licensing exam.
“The real big issue for companies is noncompete agreements,” she said. “It’s a big issue for executives. When Errol Samuelson left realtor.com and moved over to Zillow, he had a noncompete, and it was a knockdown, drag-out public fight.”
Cofano said a ban on noncompete agreements will force real estate companies to rethink their retention strategy. Instead of using noncompete agreements to strongarm employees into staying, companies will have a wider range of incentives to retain their top talent at the corporate and executive levels.
“I could see that having an impact on requiring brokerage companies to treat their employed executives more with a carrot than a stick in terms of competition, and that could have a pretty interesting impact,” he said. “Because what we know is the branch managers and people that are working directly with the agents have a lot of relationships with those agents, and sometimes there can be a really significant pull if they were to leave, one company for another company. A lot of agents might want to go with them.”
Furthermore, Cofano said the elimination of noncompetes could rattle real estate technology companies harder than brokerages. “Again, companies on the technology side will have to do more for their key employees for retention,” he explained while noting the rise in stock options and other perks. “They have to figure out ways to keep them from going off and running to another company.”
On the agent side, Cofano and Lissack said the elimination or limiting of noncompete agreements will have little to no impact on real estate agents.
“In the brokerage companies I’ve worked with, I have ever done noncompetes with an individual independent contractor,” Cofano said. “So I honestly don’t think that any sort of limitations or reductions of enforceability of noncompetes can have much impact on sort of the agent population.”
Furthermore, Lissack said noncompete agreements at the agent level are an “explicit rule violation,” even if some brokers try to enforce them. In that case, he noted agents can still leave a brokerage at their direction, with the biggest risk being held from joining a brokerage for up to 30 days, depending on state law.
“You can’t hold somebody captive,” he explained. “Almost every state either has a provision for pulling a license back from [an agent] or demanding that it be surrendered. I mean, there are some states that just do it automatically [and] in some states, the license has to go through the mail and you have to go through a demand process.”
“For example in Virginia, somebody could hold you up for 30 days,” he added. “Beyond that, they can’t do anything.”
Lissack also noted any changes the FTC makes to noncompete agreements will more likely impact large companies and franchisers than small, independent brokerages.
“This is where it gets to be very weird because the federal government cannot adopt a rule about noncompete agreements that only apply within a state,” he said. “If I am in Boston, and I want to switch to a firm this in Worcester, and the state of Massachusetts allowed that kind of noncompete agreement, you can’t argue that it’s interstate commerce, right? That’s within the jurisdiction of the state.”
“On the other hand, if I tried to go to Hartford, Connecticut, that would be crossing state lines. That would be interstate commerce,” he added. “Now, what the federal government order says it’s going to do is regard noncompete agreements as prime facie pro se evidence of antitrust.”
According to Cornell Law, prime facie pro se evidence is simply whatever is “sufficient to establish a fact or raise a presumption unless disproved or rebutted.” That fact, Lissack said, “should scare the living daylights out of anybody that’s big.”
What about those other ‘unfair industry-specific’ business practices?
Ross and Cofano said the final real-estate-related mandate in the order about “unfair industry-specific practices that substantially inhibit competition” is most likely a nod to the ongoing battle between the Department of Justice and the National Association of Realtors (NAR).
On July 1, the DOJ pulled out of a proposed settlement with NAR after NAR allegedly refused to “modify the settlement to protect the agency’s ability to investigate other NAR conduct that could impact competition in the real estate market,” according to a previous Inman article.
The Department also dismissed the complaint without prejudice, meaning they can file another complaint against NAR in the future. “Because the settlement resolved only some of the department’s concerns with NAR’s rules, this step ensures that the department can continue to enforce the antitrust laws in this important market,” the DOJ explained.
Cofano said Biden’s executive order “is in concert” with the Department of Justice’s withdrawal and confirms the battle between the DOJ and NAR is far from over.
“There’s no question that these agencies are not acting in silos, and so I would expect the FTC to be dealing with very similar issues that the DOJ might be looking at,” he said. “That’s data and commission sharing, lockboxes and other things that historically have been operated under the construct of traditional real estate.”
When asked about their take on Biden’s executive order and how it could impact their antitrust battle with the DOJ, NAR reiterated its July 1 statement and said it’s confident in its rules and the Multiple Listing Service systems.
“NAR regularly reviews and updates our rules and policies with the best interests of U.S. consumers in mind while helping our members to understand and implement any such changes,” a NAR spokesperson said in an emailed statement. “We remain committed to further preserving, protecting and advancing the American dream of homeownership.”
“We remain confident in the pro-consumer, pro-competitive nature of our rules and the MLS system, all of which benefit home buyers and sellers by providing a fair and level real estate marketplace,” adding “NAR will aggressively protect and defend any challenge to the rights of consumers to have access to a system that is pro-consumer, pro-competitive and creates a highly efficient market for the benefit of home buyers and sellers.”
In addition to NAR being put back into the hot seat with the DOJ, Lissack said REX Real Estate’s antitrust suit against NAR and Zillow could also be impacted by the executive order.
“You could take the REX lawsuit about whether or not you’d have to have your properties listed in the MLS in order to appear on the first page of Zillow. That’s an exclusionary unfair practice,” he said. “You could make a whole argument about who should be paying buy-side commissions and whether that may or may not be an unfair practice.”
“I mean, I also think that it’s an unfair practice not to disclose buy-side commissions. I also think in the states that prohibit rebates, that’s an unfair practice,” he added. “It’s opened up a whole can of worms. Real estate is getting nailed by all three of those [labor market] mandates.”
So what’s next?
Marilyn Wilson, founding partner of WAV Group and chair of National Small Business Association’s (NSBA) Economic Development Committee, said there “are definitely some things in there that are concerning for real estate,” but it will take time to see exactly how the FTC will handle the mandates given to them.
However, she said the current administration’s staunch approach to consumer protections could provide clues as to what might be coming down the pipeline.
“I don’t think anybody knows [what’s going to happen] yet,” she said. “The last DOJ agreement the industry was negotiating was done under the Trump Administration was relatively limited [to] just two key components, and as you know, that blew up just a few days before this whole announcement came out.”
“What I’m getting from being part of NSBA is that there’s just gonna be a lot more focus on consumer protection in general, which is overall is a really good thing, right?” she added. “We want those protections. There are discussions about predatory lending practices and limiting that, and net neutrality could be coming back as well. So, there’s a lot of good things coming out of it.”
Wilson said the language of the order is very general right now, and the FTC might not even know what it should or shouldn’t be targeting when it comes to real estate. “It’s a very comprehensive bill. I mean, it talks about transportation and the wine industry and cows, and it goes all over — it’s got a billion different topics, and we’re just one very, very small piece of it,” she explained. “To be honest with you, I’m not even sure the government knows what exact changes they want from us.”
No matter what the FTC hands down, Wilson said she’s confident in the real estate industry’s ability to adapt — a fact she wants her fellow agents and brokers to remember as the winds of change sweep the industry’s way.
“Here’s the thing, I think no matter what [the order] ultimately means, our industry is very resilient,” she said. “We know how to adapt, we know how to adjust, and the bottom line is, what do we do? We serve the needs of customers.”
“Are we going to stop doing that anytime soon? No, we’re not.”